If It's Called The Number One Rule, Location Might Be Important!

By
Real Estate Agent with Rich Life Real Estate Team GA#242237

If It's Called The Number One Rule, Location Might Be Important!

Great Looking

I've got about two sentences to grab your attention, because this is the most over used phrase in real estate! Location, Location, Location....sounds familiar doesn't it?  As the last three to four years has developed a feeding frenzy in real estate, people often forget some of the most important considerations when buying high return real estate.  Certainly for a while it seems that the number one rule seemed to take a back seat to the #2 rule, Cash Flow Is King!

There is no question that buying a property for high returns that provides a 10-12% or higher return on your investment is wise, especially when you can't count on continual appreciation. While the cash flow that an investment property provides is crucial in analyzing a great deal, let us not forget that long after the market rebounds, there will always be really cheap properties in bad areas, as well as homes that are in need of major rehab!  This means that the Cash Flow Is King Rule, must always work in hand with Location, Location, Location.

The first reason for this is that the properties that are in superior locations will appreciate much faster, while still providing very desirable cash flows.  The ROI in the short term may be a few percentage points lower, but in the long term the value will increase to the point that an investor might make a much larger capital gain.  This end profit is important to consider, especially if you are using a 1031 exchange to roll into larger portfolios.

Secondly, if the property is projecting a very high Return on Investment because it is in a very cheap area, you might want to find out the reasoning behind why it is such a cheap area?  If a house is selling for $8,500 and doesn't appear to need major rehab it may be related to  being in a very high crime area, which means that it will be very hard to attract quality tenants, and the tenants you do attract may be harder on the property, leading to much higher maintenance costs than projected.  If the neighborhood is too rough, Section 8 may not even allow their applicants to live in the home, thus depleting your tenant base further.  If the tenants ever move out, it's a race to see who can steal your copper plumbing, condensing unit, or even your electrical wiring!  SO YOU NEVER WANT TO BUY IN VERY HIGH CRIME AREAS EVEN IF THE PROPERTY IS REALLY CHEAP!  In bigger city urban cores this can be block by block, and so you really have to have an expert or avoid the urban core all together.

Another thing about cheap properties, is that if the maintenance is so great that it's going to take a 6 month renovation, you are likely better moving on, even if you can do the work yourself.  Some properties require so much renovation that experienced investors stay away and are glad to leave such heavy lifting to a novice who doesn't realize what they are getting into.  Often these huge projects leave much room or error and your profits quickly get eaten up in latent defects!

 

Money Pit

The language below was in the listing on this one and gives you some ideas, if the picture didn't already say 1,000 words!

SOLD AS IS NEAR COLLEGES, EXPRESSWAYS, DOWNTOWN. NO SELLER'S DISCLOSURE, NO TERMITE OR WARRANTIES; FINAL APPROVAL OF OFFER AND CLOSING CONTINGENT UPON COURTS APPROVAL

If you really want a great investment with very little risk, why not partner with Former Rich Dad Poor Dad Coach Jared Garfield and the Rich Life Real Estate Team?  Having done over 1,800 properties as a team gives us plenty of experience in selecting the right properties, doing the rehab correctly and managing the property with excellent tenants.  

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Tags:
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Rainer
62,118
John Owen
Right at Home Realty Inc., Brokerage - Oshawa, ON
Broker serving Durham Region, Ontario

Jared, you have some serious challenges in some of your territory!  Excellent article.

Jan 27, 2014 11:47 AM #1
Rainer
50,010
Jared Garfield
Rich Life Real Estate Team - Buford, GA
Invest With The Best For The Highest Returns!

John,

There are so many challenges for real estate investors in general, and in this article I have tried to illustrate a couple of don'ts.  However, due to your comment I think I will go ahead and point out a couple of examples of great deals that are in lower income areas, but not high crime areas, and that didn't need much fix up!  The main point is, that as an investor it's so vital to have the right team, and that team needs to know the difference between a cheap property and a property that is a great value.  By the way, we work with a lot of Canadian investors, and would love to pay you handsome referral fees if you have investors that might like 12-16% Return on Investment properties that have tenants in place.

Jan 27, 2014 12:39 PM #2
Ambassador
2,491,688
Fred Griffin Tallahassee Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

That second photo - IMHO you are buying a lot with a tear-down on it! 

Jan 28, 2014 01:46 AM #3
Rainer
50,010
Jared Garfield
Rich Life Real Estate Team - Buford, GA
Invest With The Best For The Highest Returns!

Fred, that's the only thing that would work on that one, but I mainly put that up there because it was comical!  Wouldn't it have been better to have done the tear down first and then market the lot?  Funny what people think!

Jan 28, 2014 01:53 AM #4
Rainmaker
827,872
Troy Erickson AZ Realtor (602) 295-6807
Good Company Real Estate www.ChandlerRealEstate.weebly.com - Chandler, AZ
Your Chandler, Ahwatukee, and East Valley Realtor

A great deal in a bad location will never be as great as one thinks. It's better to have a good deal in a great location as far as I am concerned.

Jan 28, 2014 02:04 AM #5
Rainer
50,010
Jared Garfield
Rich Life Real Estate Team - Buford, GA
Invest With The Best For The Highest Returns!

Troy, that is exactly right!  Each city across the country, even Detroit, which I think is a terrible market as a whole, still has great locations that have very good deals (you sure have to be a lot more selective in a market like that though)!

Jan 28, 2014 02:16 AM #6
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Rainer
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Jared Garfield

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